There are three options for the software package solution. Although all three packages are considered to be adequate for the intended purpose, there are licensing and pre-installation customization fees that differ between the potential solutions. Accordingly, there are also differences in how much incremental revenue the software will create – through increased revenue opportunities as well as cost savings. It is anticipated that the risk level of the project will be associated with the level of customization required – the more customization, the higher the risk that something will go wrong. For the three options, use an appropriate financial measurement to identify the correct software solution. Your company’s finance department has instructed you to use the following rates based on differing levels of risk: High risk: 20% Medium risk: 12% Low risk: 5% Software License fee Customization Estimated annual benefit Number of years in service Option A 1,400,000 350,000 185,000 10 Option B 700,000 475,000 310,000 12 Option C 950,000 90,000 250,000 8 i) Calculate the payback period for each option. ii) Calculate the NPV (net present value) for each option. iii) Choose the preferred option and justify your choice, including any critical comments you may have about the analysis.
There are three options for the software package solution. Although all three packages are considered to be adequate for the intended purpose, there are licensing and pre-installation customization fees that differ between the potential solutions. Accordingly, there are also differences in how much incremental revenue the software will create – through increased revenue opportunities as well as cost savings. It is anticipated that the risk level of the project will be associated with the level of customization required – the more customization, the higher the risk that something will go wrong.
For the three options, use an appropriate financial measurement to identify the correct software solution. Your company’s finance department has instructed you to use the following rates based on differing levels of risk:
High risk: 20%
Medium risk: 12%
Low risk: 5%
| Software | License fee | Customization | Estimated annual benefit | Number of years in service |
| Option A | 1,400,000 | 350,000 | 185,000 | 10 |
| Option B | 700,000 | 475,000 | 310,000 | 12 |
| Option C | 950,000 | 90,000 | 250,000 | 8 |
i) Calculate the payback period for each option.
ii) Calculate the NPV (
iii) Choose the preferred option and justify your choice, including any critical comments you may have about the analysis.
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